BFH changes case law on interest-free deferral of purchase prices

Germany's Federal Fiscal Court (BFH) has revised its stance on the taxation of interest-free deferrals of purchase prices in two recent decisions (cases no. VIII R 30/24 and VIII R 1/23). Previously, tax authorities and case law generally considered that installments of an interest-free deferred purchase price contained hidden interest components, which were taxable as capital gains for the seller.

The BFH's new rulings reject this taxation method. In the cases examined, parents sold properties to their adult children and agreed upon interest-free deferrals of the purchase price, to be paid in installments over an extended period. Tax offices had calculated the implicit interest using the statutory interest rate and taxed these amounts as investment income for the parents.

However, the BFH found in favor of the taxpayers. The court determined that the installment payments were exclusively applied to the purchase price itself and did not constitute taxable interest. The parties had explicitly agreed to the deferral without consideration, meaning no interest was intended. Therefore, the BFH abandoned its prior case law, which had assumed a taxable interest component even in the absence of an explicit interest agreement.

BDO AG, a tax advisory firm, highlighted that this decision marks a significant shift. The previous practice of automatically assuming taxable interest income from deferred purchase prices, even when explicitly stated as interest-free, has been overturned. This change could have implications for future property transactions and estate planning involving installment payments.